Economists caught off-guard by sudden downgrade

Windhoek-Economic analysts have questioned the timing, as well as the veracity of specific aspects of the recent downgrade by Moody’s Investor Services of Namibia’s international credit rating position to sub-investment grade.

While supporting the assessment that the domestic economy is in dire straits, particularly due to massive liquidity constraints, economists admit they were caught off-guard by the latest rating that essentially put Namibia’s international debt issuances in “junk status”.

“We consider the timing of Moody’s downgrade somewhat peculiar and certain elements retrospective rather than forward-looking. However, it is our opinion that government could have better articulated itself on cohesive strategies to mitigate the sovereign credit risk factors cited for the negative ratings action,” said Ngoni Bopoto, a research analyst at Namibia Equity Brokers.

Bopoto points out that Moody’s, for instance, refers to the erosion of Namibia’s fiscal strength due to a sizeable mismatch in government’s revenue generating capacity and expenditure responsibilities and an increasing debt burden. “It remains our firm opinion that a clear strategy to commercialise select state owned-enterprises and liquidate non-core assets that is based on tangible milestones would have gone a long way to allay these concerns,” he stated.

He further noted that limited institutional capacity, which is the second key downgrade factor, continues to plague most emerging markets, which, due to their open nature are vulnerable to external shocks.

“At post-budget interventions earlier this year we emphasised the importance of developing local research capacity as a foundation for Namibia’s self-discovery, this was also addressed in the minister’s budget speech, which highlighted the need to strengthen macro-fiscal modelling capacity. Having realised the aforementioned ourselves, perhaps Moody’s should have allowed more than four months to accomplish this,” Bopoto suggested.

However, Bopoto pointed out that continued unauthorised public expenditure, which results in unbudgeted arrears to the private sector and subsequently exerts pressure on the banking sector, has the potential to destabilise the economy.

“Our view is that government would do well to take heed of the downgrade, communicate a cohesive plan of action and effect the necessary adjustments. Game theory presents several strategies, which could prove useful in the government’s various engagements, including understanding investor psychology,” said Bopoto. Frans Uusiku, an economist at Simonis Storm Securities, believes the rating action also points to scepticism about what the unbudgeted arrears to the private sector mean for fiscal prudency. Purvance Heuer, head of research at Simonis Storm Securities, said: “I think the downgrade is probably justified, even though it was a bit unexpected. I think the problem mainly pertains to the strength of the fiscus and in particular the liquidity constraints of government. The fact that there are a number of invoices that have been outstanding for a long period of time is a case in point.”

He went on to say uncertainties around SACU receipts, challenges with expenditure structuring, as well as unbudgeted arrears to the private sector, which represents about one to 1.5 percent of GDP, were major contributing factors to the downgrade.

This week Finance Minister Called Schlettwein was adamant that no additional borrowing was incurred to pay for the outstanding invoices, of which N$1.7 billion worth of outstanding invoices has been paid to date. Also, the Ministry of Finance says all funds for outstanding invoices were from government’s cash reserves and budgeted funds.

“All borrowings undertaken this year are in line with the expectations in the budget and therefore the statement from Moody’s that there are ‘sizeable fiscal imbalances and an increase in debt burden’ does not hold,” said Schlettwein in a recent statement. In response, Schlettwein said a review of the country’s rating only four months into the budget implementation for the 2017/18 financial year was premature and premised on a very narrow base of evidence and may very well contain speculative conclusions on the performance of the budget for the whole financial year. He added that the latest records from the fiscus indicate a current debt level of 41.9 percent, which is within the threshold of 42 percent for middle-income countries of the size of Namibia to be considered sustainable.

“The debt level of 43 percent is, therefore, overstated by Moody’s. Moreover, Namibia’s overall voluntary debt ceiling of 35 percent of GDP has been conservative and is well within the SADC convergence threshold of 60 percent of GDP,” said Schlettwein.